Solicitors Journal – Planning for the unexpected

Conveyancing solicitors may find themselves rather scratching their heads over the recent decisions dealing with conveyancing transactions which failed because the seller was a fraudster.

Although the direction of travel of the law on warranty of authority may be welcome, in that solicitors are not being asked to guarantee the identity of their clients, the decision in Dreamvar (UK) Limited v Mishcon de Reya & Another [2016] EWHC 3316 (Ch) may raise some eyebrows.

The case involved Mishcon de Reya (MdR) acting for the claimant purchaser of a property: high value, unencumbered, and vacant. The seller, represented by Mary Monson Solicitors Limited, turned out to be a fraudster, a fact discovered only after the Land Registry queried the transfer documents – too late for the purchase price to be recovered.

The court found that MdR had not done anything wrong. It had not been negligent and had acted reasonably and honestly.

Nevertheless, the court found that there was an implied term in MdR’s retainer to the effect that it was only authorised to pay completion monies on completion, which, in this context, meant a genuine completion. Given that completion in this instance was not genuine because the documents had been signed by a fraudster, MdR was in breach of trust.

Insurance factor

Interestingly, the judge’s reasoning for finding that MdR should not be entitled to relief pursuant to section 61 of the Trustee Act 1925 was focused almost exclusively on the fact that MdR carried professional indemnity insurance sufficient to meet the claim and, even if it had not carried such insurance, would have been in a better position to stand the loss than the claimant.

The seller’s solicitor was found to have no liability to either the claimant or to MdR. This is consistent with a line of authority confirming that a solicitor’s warranty of authority does not guarantee the identity of their client, merely that they have a client.

It may well come as no surprise that the case will now go to the Court of Appeal, possibly to be heard together with the case of P&P Property Limited v Owen White & Catlin LLP, Crownvent t/a Winkworth [2016] EWHC 2276 (Ch). In the meantime, of course, conveyancers and COLPs may wish to update their risk registers and check they are advising purchaser clients to be aware of the rise in incidence of property fraud.

From a regulatory perspective, the rationale for apportioning liability in this way as between two honest and innocent parties does not sit comfortably with the SRA’s expressed desire to abandon minimum levels of PII cover on the basis of the minimum terms. If a firm is to be asked to bear losses associated with a third-party fraud on the basis that it is best placed to bear the loss, how will those risk factors play out in an insurance market which is truly left to the market? Any solicitor, no matter how experienced and reputable, would be vulnerable to a potentially significant claim arising because of matters beyond their control. How can firms plan for that?

The obvious solutions are to look at the terms of undertakings, and to insist on express warranties of authority, special conditions attaching to signatures, or even a return to completions in person. The added cost and risk associated with such measures may make them unworkable.

Third-party accounts

Cases such as this may increase calls for the use of third-party managed accounts. One does wonder, however, whether the use of such accounts would result in liability being excused in these circumstances. After all, the issue is that MdR were strictly liable because documents they received had not been signed by the person purporting to sign them.

If, for the sake of argument, the funds had been held in a third-party managed account, it is still likely that they would have been held there and released on MdR’s authority, and thus that the trustee of the money for these purposes would still have been the firm rather than the third party.

It is fairly generally accepted that one cannot truly plan for deliberate fraud. Any system will have weaknesses which will only become apparent over time and those involved in seeking to prevent fraud will necessarily be playing catch up.

This article was first published by Solicitors Journal on 28 February 2017, and is reproduced by kind permission. You can read the original article by clicking here.

Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.